Xilinx Inc. and Subsidiaries - Page 25

         expenses not related to the operation of the relevant business               
         activity.”  Sec. 1.482-5(d)(3), Income Tax Regs.                             
              Respondent contends that petitioner paid its employees ESOs             
         in exchange for research and development services, and such                  
         services contributed to petitioner’s development of intangibles.             
         In support of his position, respondent emphasizes petitioners’               
         tax treatment of options for section 41, Credit For Increasing               
         Research Activities, and section 83 purposes.                                
              Petitioners contend that there was no outlay of cash upon               
         the issuance of its ESOs, and thus, no cost was incurred.                    
         Petitioners further contend that any cost associated with the                
         ESOs was borne by shareholders because the exercise of ESOs                  
         increased the outstanding shares and reduced existing                        
         shareholders’ earnings per share.  In addition, petitioners                  
         contend that the costs determined by respondent are not related              
         to petitioner’s intangible development area.  Assuming arguendo              
         that the spread and the grant date value are costs for purposes              
         of section 1.482-7(d), Income Tax Regs., we conclude that                    
         respondent’s allocations fail to meet the requirements of section            
         1.482-1(b), Income Tax Regs. (discussed infra section III.D).                

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Last modified: May 25, 2011